The Real Deal New York

A mini boost for NYC’s hotel sector

RevPAR is up, but pricing has yet to follow suit
By Chava Gourarie | April 01, 2018 01:00PM

The Pod Hotel in Times Square

Manhattan’s hotel industry got a much-needed boost when its gold-standard metric turned a corner at the end of 2017. Revenue per available room — known in industry lingo as RevPAR — rose in 2017’s fourth quarter for the first time in more than two years, according to a report from PricewaterhouseCoopers.

Citywide, the trend stuck into January and February, the most recent months on record, with RevPAR increasing 4.8 and 3.6 percent, respectively, according to data from hotel research and analytics firm STR.

There is one big asterisk, however. The majority of the growth did not come from a jump in pricing. Instead, it came from higher occupancy levels.

“We’re selling a lot more rooms to a lot more people coming to New York City,” said Jan Freitag, a senior vice president at STR. “That should imply that there’s pricing power, but there’s not.”

In February, hotel occupancy in the city was up 3 percent year-over-year, while the average daily room rate — aka price — increased by just 0.6 percent, to $184, which is statistically flat.

Given that the city’s room rates have declined annually since the post-recession peak in 2014, two months of flatlining is actually welcome news. “It’s a very significant improvement in that it’s not going down,” said Sean Hennessey, the CEO of consulting firm Lodging Advisors. “It’s the early stages of a trend.”

But what these statistics say about the overall health of the hotel sector and whether they mark a true turning point is still unclear.

Generally, analysts point to oversupply as the culprit for weak pricing. And New York has seen a tremendous amount of hotel development since the end of the recession. There have been 23,160 new hotel rooms added to the market in the five boroughs since 2013 — bringing the total number of New York City rooms to 119,103. And there are roughly 7,800 more rooms slated to come online this year in Manhattan, which is home to 87 percent of the city’s hotel supply.

That includes the flagship 655-key Pod Hotel in Times Square, which opened in January, the Lam Group’s Virgin Hotel in NoMad and a forthcoming Ace Hotel on the Lower East Side.

Despite the flood of new supply, hotel owners are managing to increase the number of beds they’re filling — a sign that demand is robust. In fact, through December 2017, the market has logged 67 straight months of above 85 percent occupancy, according to a report from hospitality consulting group HVS. But during that time, pricing has continued to slide. So why aren’t prices keeping up with occupancy?

Sources say there are several factors at play, most notably the type of new hotel product coming online. Hennessey noted that much of the new supply has been for mid-priced — or budget — hotels rather than for luxury. That, he said, “suppresses room rates.”

Geoffrey Mills, CEO of management firm GAM Hospitality, said many hotel owners are trading room rates for occupancy. “In the first quarter, we had more discounting than normal,” he said, explaining that owners have dropped prices to meet occupancy goals.

Hotels may be keeping rates down to compete with home-sharing websites such as Airbnb and attract business from price-matching websites.

Despite pricing softness, investors are showing interest in the sector. Jay Morrow, of Hodges Ward Elliott, said he’s seen more hotel investment sales activity in New York lately.

“Investor sentiment is absolutely picking up,” said Morrow, noting that he’s been fielding more calls from international investors, who want to get in before there’s a sustained resurgence.

Generally, investor enthusiasm precedes an overt spike in the numbers, said Morrow, since once there’s clarity in the market, investor opportunities are less attractive.

Mills said the positive RevPAR and other indicators point to a coming thaw, though perhaps not just yet.

“We are looking at probably a flat year,” said Mills. “But the overall trending is that we’re coming out of this, so that by 2019, we should see a positive growth year.”